bank run blog

Federal Reserve Board Chairman Ben Bernanke testified before Congress this morning, offering his considered opinion that the country may experience a recession. According to the Associated Press :

“For the first time, Federal Reserve Chairman Ben Bernanke acknowledged the U.S. could reel into recession from the powerful punches of housing, credit and financial crises.”

Bernanke, whose brief tenure at the helm of the Fed has been consumed by continuous crisis management, remained a master of understatement throughout.

“’A recession is possible,’ said Bernanke, who is under immense political and public pressure to turn things around. ‘Our estimates are that we’re slightly growing at the moment, but we think that there’s a chance that for the first half as a whole there might be a slight contraction.’”

The Fed chief also described in detail what a bailout isn’t :

“The Federal Reserve’s unprecedented actions to prevent the collapse of Bear Stearns were taken to preserve the ‘integrity and viability of the American financial system’ and did not represent any kind of bailout, Fed Chairman Ben Bernanke said Wednesday.

Bernanke told a congressional panel that the Fed and other government agencies were informed on March 13 that without help Bear Stearns Cos. would have to file for bankruptcy the next day, forcing the central bank to make the difficult choice of deciding whether to allow the nation’s fifth largest investment bank to collapse or provide assistance.”

Associated Press : Bernanke Says Recession Possible

Associated Press : Bernanke: Bear Stearns Wasn’t a Bailout

Less than two weeks after the Federal Reserve Board and the Federal Reserve Bank of New York arranged the purchase of investment bank Bear Stearns by commercial banking group JPMorgan Chase, the deal is unraveling amid shareholder lawsuits, political recriminations, and public protests. Reuters reported on the social backlash :

“About 60 protesters opposed to the U.S. Federal Reserve’s help in bailing out Bear Stearns entered the lobby of the investment bank’s Manhattan headquarters on Wednesday, demanding assistance for struggling homeowners.

Demonstrators organized by the Neighborhood Assistance Corporation of America chanted “Help Main Street, not Wall Street” and entered the lobby without an invitation for around half an hour before being escorted out by police.”

Today also saw significant activity on Capitol Hill, according to Bloomberg :

“The Senate Banking and Finance committees are probing the government-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co., voicing concerns about the risk posed to taxpayers from federal involvement in the deal.”

The report noted a wave of skepticism about the terms of the agreement, which heralded an unprecedented expansion of Fed intervention in the financial markets :

“The committees’ inquiries may herald a broader congressional backlash against the agreement, which Senate Majority Leader Harry Reid of Nevada has described as a ‘bailout.’”

Reuters : Protesters enter Bear Stearns building in New York

Bloomberg : Bear Stearns Sale to JPMorgan to Be Probed by Senate

Bewildered Americans struggling to understand how a catastrophic failure of the US banking system just sort of snuck up on them may wish to consider a few crumpled scraps from last week’s recycle bin.

Bear Stearns CEO Alan Schwartz got a lot of airtime :

“Last Monday, when rumors started to circulate on Wall Street that Bear Stearns was short on liquidity and might not have enough cash to do business, the firm’s executives tried to tamp down the negative chatter with a news release. It said Bear Stearns’ ‘balance sheet, liquidity and capital remain strong. … There is absolutely no truth to the rumors of liquidity problems that circulated today in the market.’”

On Wednesday, Bear Stearns CEO Alan Schwartz appeared on CNBC to reassure investors that the firm had ample liquidity and said he was ‘comfortable’ that it would turn a profit in its fiscal first quarter. By Thursday, Bear Stearns’ solvency was being called into question and by Friday it told regulators it was ready to file for bankruptcy.”

Jim Cramer of CNBC’s Mad Money had some advice :

“Last week, a viewer wrote in asking if he should be ‘worried about Bear Stearns in terms of liquidity’ and if he should get his ‘money out of there’.

‘No! No! No!’ Cramer screamed back at the camera. ‘Bear Stearns is just fine. Do not take your money… Bear Stearns is not in trouble. If anything, they are more likely to be taken over. Don’t move your money from Bear. That’s just silly. Don’t be silly.’”

Treasury Secretary Henry Paulson was against federal intervention before he was for it :

“Paulson bristled at suggestions the Bush administration had not done enough to forestall the sharp economic slowdown that stemmed from a historic downturn in the nation’s housing market.

‘Can we outlaw the forces of gravity? How much can the government do?’ he asked.”

Speaking of the forces of gravity, President George W. Bush weighed in :

“’One thing is for certain, we’re in challenging times,’ Mr. Bush told reporters after meeting with his top economic aides. ‘But another thing is for certain — that we’ve taken strong and decisive action.

‘The United States is on top of the situation,’ Mr. Bush said.”

International Herald Tribune : SEC hasn’t ruled out possible legal action over statements by Bear Stearns before takeover

Daily Telegraph : Cramer’s in a credit crisis of his own

MarketWatch : Paulson seeks to shore up financial confidence

Wall Street Journal : Bush Seeks to Give Assurances On Stability of Capital Markets

Investment bank Bear Stearns, which closed at $30 on Friday, has been sold for $2 a share in an all stock transaction, according to the Associated Press :

“JPMorgan Chase said Sunday it will acquire rival Bear Stearns in a deal valued at $236.2 million, a stunning collapse for one of the world’s largest and most venerable investment banks.”

Many predicted that Bear wouldn’t last the weekend, but the final price and terms of the deal are still astounding :

“A collapse of Bear Stearns could have created a further crisis of confidence in world financial markets amid a deepening credit crunch. JPMorgan’s acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago.

The deal represented a 93.3 percent discount to Bear Stearns’ market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29.”

full story

Also this evening, the AP is reporting that the Fed Takes New Steps to Ease Crisis :

“The Federal Reserve announced a series of new steps Sunday to help provide relief to a spreading credit crisis that threatens to plunge the economy into recession.”

The story notes the unprecedented nature of the Fed’s activities :

“The Fed’s actions are the latest in a recent string of unconventional steps to deal with a worsening credit crisis that has unhinged Wall Street. And, the action comes just two days before the central bank’s scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered.”

full story

The dramatic events of Friday have given way to an uneasy weekend of speculation about the next phase of the banking crisis. With a full percentage point cut in the Federal funds rate already priced in, investors are starting to look suspiciously at the rest of the big five investment banks : Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Bros. Goldman seems to be in the least worrisome position, with Lehman probably the most exposed. MarketWatch reports :

“The emergency bailout of Bear Stearns Cos. dented confidence in other securities firms ahead of results next week from some of Wall Street’s giants including Goldman Sachs, Morgan Stanley and Lehman Brothers, analysts said on Friday.”

An Associated Press article reprinted in BusinessWeek echoes the doubts about Lehman’s ability to survive the next round :

“But Lehman Brothers Holdings Inc. appears to be an investment bank that investors are very worried about right now — mainly because it is the investment bank that is most similar to Bear in structure and exposure. Its stock dropped more than 14 percent on Friday.”

MarketWatch : Bear bailout sparks concern about other brokers

BusinessWeek : After Bear Stearns, who may be next?

Wall Street Journal : A Liquidity Squeeze Reveals Vulnerability Of a Wall Street Firm

Bloomberg News : S3 Partners Pulled $25 Billion From Bear Stearns, WSJ Says

The market, which was up about 47 points on this morning’s favorable inflation figures, plummeted more than 300 points after traders got wind of a new private/public bailout plan for Bear Stearns. An official statement finally confirmed the disastrous state of the investment bank’s position, after a week of denials, according to the Wall Street Journal :

“Bear Stearns executives had reassured markets all week that the bank’s financial position was solid, but were ultimately forced to seek help.

‘We have tried to confront and dispel these rumors and parse fact from fiction,’ CEO Alan Schwartz said in a release. ‘Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.’”

Some observers now expect Bear Stearns to ultimately be acquired by JPMorgan Chase.

Wall Street Journal : Bear Stearns to Get Backing From J.P. Morgan, N.Y. Fed

Associated Press : JPMorgan Chase, With Federal Reserve Bank of NY, to Provide Funding to Bear Stearns

Reuters : Market briefly falls more than 2 pct

Tuesday’s huge rally on the announcement of a new Fed plan to provide emergency capital for the US banking system has been followed by market volatility, as traders began to digest the possible implications of the Fed’s move. Persistent rumors of imminent insolvency of a major institution were reported by the Times :

“Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed’s unprecedented move to pump $280 billion (£140 billion) into global markets was seen as a sure sign that at least one financial institution was struggling to survive.

The name on most people’s lips was Bear Stearns. Although the Fed billed the co-ordinated rescue as a way of improving liquidity across financial markets, economists and analysts said that the decision appeared to be driven by an urgent need to stave off the collapse of an American bank.”

Even after the apparently made-to-order federal intervention, the market remained wary of the bank’s position. According to Bloomberg this afternoon :

“Traders have been reluctant to engage in long-term transactions such as credit-default swaps with Bear Stearns as the counterparty, the Wall Street Journal reported today. Chief Executive Officer Alan Schwartz, who took over from James “Jimmy” Cayne in January, denied reports that the firm’s access to capital is at risk.”

Times (UK) : Despite the Federal Reserve’s efforts Wall Street fears a big US bank is in trouble

Bloomberg : Bear Stearns Falls to 5-Year Low on Capital Concern

MarketWatch : Fed action may have targeted Bear Stearns: analyst

Reuters : Bear Stearns Stock Plunges Amid Risk Worries